Industrial & Commercial Market Commentary - 2017
The general industrial and commercial property market has been extremely strong over the past 24 months particularly in 2016 with very strong interest for good quality investment assets occurring. During 2015/2016 yields compressed relatively significantly due to increased demand attributed to the low interest rate economy. Coming into 2017 the market is still extremely firm with yields compressing slightly further but not to the same degree as 2015. Generally over all property cycles good quality properties which form solid investments with good quality tenant and lease covenants, located in good locations have always been in relatively strong demand, however during these more aggressive buoyant times, second tier properties have also sold readily with investors being less discretionary particularly in regard to lease covenant and market rental levels.
The market post the Global Financial Crisis was predominantly characterised by purchasers for owner occupation taking advantage of the then low interest rate economy. Owner occupiers pay less attention to market derived returns but focus on price in relation to construction costs and more importantly debt servicing. During that period investors were less willing to accept the lower derived yields, however in 2015/2016 investors sentiment changed with investors re-entering the market at the lower yield levels.
Currently evidence of yields in the marketplace are between 5% to 8% with some evidence of yields as low as 3%. These generally being for properties for redevelopment which have a high underlying land value and low potential holding income.
Overall the market may be best described as overheated with excessive demand and very limited supply of commercial real estate where analysed yields are not really attracting a significant premium over and above the cost of borrowing or opportunity cost interest rates. We refer to Cameron Bagrie, ANZ economist comment in 2016 who has indicated that the market should be in “amber alert” as the market growth has been fuelled by debt and therefore with a potential to see a significant retraction in the short to medium term.
What is significant is due to the compressed yields, although investors are prepared to accept a lower return as the cost of borrowing has reduced due to the lower interest rate economy, the timeframe for repayment of the asset is significantly increased. This is significant as an investor may not have sufficient equity to ride out the additional property cycles.
The overall average of the initial yield for all commercial property sales analysed at Property Solutions occurring in Tauranga were as follows:
It will be interesting to see what the 2017 elections bring.